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Asia Striving to Avoid Deflation

Asia’s rapid accumulation of debt in recent years is holding back central banks from easing monetary policy to fight the risk of deflation, endangering private investment needed to boost faltering growth, according to Morgan Stanley.

Debt to gross domestic product ratio in the region excluding Japan rose to 203 percent in 2013 from 147 percent in 2007, with most of the increase coming from companies, analysts led by Chetan Ahya in Hong Kong wrote in a report Tuesday. The ratio is close to or has exceeded 200 percent in seven of 10 nations including China and South Korea, they said, according to a Bloomberg report.

Deflation risk is spreading from Europe to Asia as oil prices plunge, raising the specter of companies and consumers postponing spending and threatening a recovery in the global economy. Asia could take its cue from the US where a policy of keeping real rates low after the 2008-2009 global financial crisis encouraged private-sector investment and boosted productive growth, the analysts said.

“When real rates are high, only the public sector or government-linked companies will take on leverage,” the Morgan Stanley economists wrote in the report. The key concern with an approach of keeping real rates at elevated levels is that the private sector will remain hesitant to take up new investment, which is critical for reviving productivity, the report said.

Asia’s policy makers are balancing the need to support domestic demand and curbing debt and asset bubbles. While China cut its one-year lending rate in November, officials have held off on broader easing measures as they sought to avoid exacerbating a build-up in nonperforming loans.

Oil Drop

India, South Korea, Indonesia, Thailand and the Philippines all held their benchmark rates last month. The Asian Development Bank in December cut the region’s economic growth forecasts for 2014 and 2015.

Oil’s decline to the lowest in more than 5 1/2 years has hurt crude-exporting Asian nations like Malaysia while benefiting others like the Philippines and Indonesia. Malaysia’s ringgit slumped yesterday to the lowest level in more than five years while the Philippines, which imports almost all its oil, sold $2 billion of 25-year debt at a record-low yield last week.

With oil slumping, Singapore’s consumer prices fell in November from a year earlier for the first time since 2009, while price gains in Thailand eased to the slowest pace in December in more than five years.

While policy makers could eventually ease enough to lower real rates, the concern is whether they will cut them enough and in time to reverse deflationary pressures, the report said.